6/29/2009 @ 7:30PM

Cash-Strapped States Target The Rich

New Jersey Gov. Jon Corzine Monday signed a 2010 budget making his state the latest to squeeze the rich for extra cash. The budget imposes a new 10.75% state income tax rate on income over $1 million and a 10.25% rate on income over $500,000, up from an old top rate of 8.97%. Both rates are retroactive to Jan. 1, effective for 2009 only, and kick in at the same taxable income level for both singles and couples.

The new law gives New Jersey the second highest 2009 state income tax rate in the nation–second only to Hawaii’s 11% rate on income over $400,000 per couple, which that state’s Democratic legislature adopted in May over the veto of the state’s Republican governor.

New Jersey is “playing a numbers game so they won’t be the highest,” says Kathleen Thies, a state income tax analyst at tax publisher CCH, a Wolter Kluwer business.

But New Jersey isn’t likely to hold the No. 2 spot for long. A spokesman for Oregon Gov. Ted Kulongoski confirmed today that he intends to sign legislation that will raise that state’s top rate from 9% to 11% on income greater than $500,000 for a couple or $250,000 for a single. The rate on income above $250,000 for a couple or $125,000 for a single would rise to 10.8%. Both increases would be effective for 2009, 2010 and 2011; and in 2012 the two top rates would fall to 9.9%.

New York led off this year’s tax assault on the rich. In April, it raised its rate on income over $500,000 from 6.85% to 8.97%. While that might look reasonable, compared to New Jersey, wealthy New York City residents pay a combined state/city rate of 12.62%, the highest in the nation.

A high state individual income tax rate isn’t necessarily synonymous with a high overall state tax burden; since real estate and sales taxes must be considered too. But in 2008, even before the most recent hike, New Jersey residents were the most heavily taxed in the nation, with state and local levies consuming an average of 11.8% of their income, compared to a national average of 9.7%. (To see your state’s burden, now and over the past 20 years, click on the Forbes interactive map here.)

By contrast, Oregon has no sales tax, and its residents paid an average of 9.4% of their incomes in state and local taxes in 2008.

The well-off weren’t the only ones who got squeezed in the New Jersey budget. State lottery players, not traditionally known as the most upscale group, were also hit with a retroactive tax hike. State lottery winnings previously weren’t taxable as income. Now any prize over $10,000 will be counted as taxable income. That change is not only permanent but also retroactive to winnings since Jan. 1.

In addition, the state put through another, back door temporary income tax hike affecting people with income above $150,000. New Jersey residents have been able to deduct up to $10,000 in local property taxes from their taxable state income. That’s not overly generous considering that the 50 New Jersey towns with the highest real estate taxes charge their residents an average of $13,000.

For 2009, those who have income between $150,000 and $250,000 will be limited to a $5,000 real estate tax deduction and those with $250,000 or more in income won’t be able to deduct any property taxes at all. That means as much as an extra $1,075 going to Trenton.

“People in well-to-do towns were already losing money in the first place with the $10,000 limit,” complains Frank Schaefer, director of state and local taxes for Grant Thornton in Edison, N.J. “Now they have this $10,000 deduction going away. I’m starting to call people with the news: Your tax bite for ’09 is going up.”